California's first carbon auction launches pollution market

Steam pipes inside the American Electric Power's (AEP) Mountaineer coal power plant in New Haven, W.V. In California, companies must now purchase permits to emit excess levels of carbon dioxide and other greenhouse gases. - SAUL LOEB/AFP/Getty Images

A big auction ended here in California. On offer, more than 60 million tons of carbon pollution. Sort of. The state auctioned millions of permits to emit carbon dioxide, and other greenhouse gases. And with that it launched one of the biggest markets for pollution in the world.

California's climate change law requires that companies reduce their pollution over time, or pay the price. But that price had no actual dollar amount until today, says Ashley Lawson, a senior analyst at Point Carbon.

"The purpose of the auction is to find what the market price is for one ton of CO2, emitted in California," Lawson says.

To give you an idea, one metric ton of carbon dioxide is what's produced by an average month of electricity use in a U.S. home. The companies impacted by California's law emit at least 25,000 times that amount each year.

"They think it will be cheaper for them to buy allowances from the state," Lawson says, "than to reduce their own emissions by adding some new technology, or changing the way their business runs."

But changing the way business operates is, ultimately, the goal of the climate change law.

"We've been living in a world where there is no price on pollution," says Dan Kammen, a professor of energy policy at U.C. Berkeley. "It doesn't send the right signals. It doesn't reward innovators."

If state permits get pricey enough, it will be worth it for companies to invest in energy efficiency, or switch to renewables like solar. In the past, they’d pass that expense on to customers, but Kammen says turning pollution into a commodity creates incentives for reducing fossil fuel use that don't trickle down as much to consumers.

"It's not expected to show up very much in the economy," he says.

Because the revenue from the auction -- the money companies pay for the right to pollute -- goes toward subsidies and programs that aim to make cleaner energy cheaper.

Eve Troeh is News Director at WWNO-FM in New Orleans, Louisiana, helping build the first public radio news department in the station’s 40-year history. She reported for the Marketplace Sustainability Desk from 2010 to 2013.